Negotiating Contractual Indemnity Obligations Denise V. Cheney, Partner, Bickerstaff Heath Delgado Acosta LLP Scott Patterson, Assistant General Counsel, UT System Friday, September 21, 2018 Session 11b 1:45-2:45 pm Room 12.106 Contractual Indemnification Overview of Indemnification Law Contract law applies to the interpretation of the indemnification obligations – and they are strictly construed. Ideal Lease Service, Inc. v. Amorous Production Co., 662 S.W.2d 1951 [contractor’s obligation to indemnify property owner for injuries sustained by contractor’s and subcontractor’s “employees” did not apply to an independent contractor paid by the contractor]. There are two types of indemnification: • indemnification against liability; and • indemnification against damages. 2 Indemnification against liability: For the obligation to arise, the amount of the cost or damages and the liability of the indemnitee for payment have to be made certain — for example, by a judgment against the indemnitee. Otherwise liability is a “future hypothetical event.” Boorhem-Fields, Inv. v. Burlington Northern Railroad Co., 884 S.W.2d 530 (Tex. App. – Texarkana 1994, no writ). 3 Indemnification against damages: A right to recover does not accrue until the indemnitee has suffered damage or injury by being compelled to pay the judgment or debt. Holland v. Fidelity & Deposit Co. of Maryland, 623 S.W.2d 469 (Tex. App. — Corpus Christi 1981, no writ). 4 Customary provision obligates the indemnitor to “indemnify, hold harmless and defend” Indemnify – to compensate or reimburse for loss or damage, D.R. Horton- Texas, Ltd. v. Markel Intern. Ins. Co. Ltd., 300 S.W.3d 773 (Tex. App.—Hou. [14th District.] 2006), order withdrawn and judgment aff’d in part and rev’d in part, 300 S.W.3d 740 (Tex. 2009) Hold harmless – In general, a hold harmless agreement is a release which extinguishes any claim the releasing party might have against the party released without regard to liability to third parties. But: Some courts have held that a “hold harmless” provision is merely an indemnification. 5 Bank of El Paso v. Powell, 550 S.W.2d 383 (Tex. App. – El Paso, 1977) illustrates distinction. • Customer had bank issue a check for $20,000 then asked bank to stop payment. • Bank required customer to sign an agreement with hold harmless language. • Bank held funds pending suit between customer and payee. • Court found: o Payee entitled to $11,000 plus $4,000 interest that accrued while bank held the funds. o Customer entitled to $9,000 plus $5,000 in accrued interest. • Court ordered: o Bank to pay these amounts. o Customer to reimburse bank for the $4,000 in interest plus $2,000 in bank’s attorney’s fees ($6,000 total) LESS an offset for the $5,000 in interest the bank earned (net $1,000). • Bank appealed arguing that customer signed a hold harmless, which released bank from any claims of liability which customer could assert against it. Therefore, customer could not assert a claim to the interest. • Court held: o hold harmless agreement was indemnity only, and not a discharge of the liability of the bank. o Indemnitor is only entitled to be protected from actual loss sustained, and is accountable for any benefits received. 6 Defend – to pursue the legal defense of the indemnified parties. The obligation to indemnify does not necessarily include the obligation to defend. D.R. Horton-Texas, Ltd. v. Markel Intern. Ins. Co., Ltd., 300 S.W.3d 773 (Tex. App-Hou. [14th District.] 2006), order withdrawn and judgement aff’d in part, rev’d in part, 300 S.W.3d 740 (Tex. 2009). 7 Indemnification against Indemnitee’s acts The indemnity can be written to shift the risk for claims caused in whole or in part by the indemnitee, provided that the Fair Notice requirements are met. Courts have upheld indemnifications against: • negligence of the indemnitee, Ethyl Corporation v. Daniel Construction Company, 725 S.W.2d 705 (Tex. 1987); • strict liability of the indemnitee, Houston Lighting & Power Company v. AT&S Railway Company, 890 S.W.2d 455 (Tex. 1994); • gross negligence of the indemnitee, Webb v. Lawson-Avila Construction, 911 S.W.2d 457 (Tex. App. – San Antonio 1995, writ dism’d). 8 Fair Notice Fair notice consists of two components: Express Negligence – intention to indemnify against indemnitee’s negligence or strict liability has to be clearly stated within the 4 corners of the contract, Ethyl Corporation v. Daniel Construction Company, 725 S.W.2d 705 (Tex. 1987). Conspicuousness – the provision must be set off in such a way as to attract the attention of a reasonable person. Dresser Industries, Inc. v. Page Petroleum, Inc., 853 S.W.2d 505 (Tex. 1993) Ex. Language in capitals, bolded, underlined. Fair notice requirements also apply to releases. 9 Drafting Considerations • In Webb, Court found that the obligation to indemnify against indemnitee’s negligence included all degrees of negligence, including gross negligence. If indemnification is intended only for ordinary negligence, expressly exclude the obligation to indemnify against indemnitee’s gross negligence and intentional misconduct. • When representing the indemnitee, keep in mind that decisions are mixed as to whether an indemnification against the gross negligence or intentional misconduct of the indemnitee is enforceable as against public policy. The Supreme Court has not decided the issue. Atlantic Richfield Company v. Petroleum Personnel, Inc., 768 S.W.2d (Tex. 1989) “We do not decide whether indemnity for one’s own gross negligence or intentional injury may be contracted for or awarded by Texas Courts.” 10 Drafting Considerations • Obligation to indemnify does not necessarily include an obligation to defend. Expressly require defense obligation if required and cover court costs, attorneys fees, and other costs. • Address how the obligations are affected, or not affected, by other conditions such as the indemnitee’s insurance, or by statutory provisions, such as comparative negligence, and worker’s compensation. • Provide for the survival of the obligation, if the obligation is intended to survive termination of the contract. • Be aware of any statutory limitations on indemnification or statutory requirements to indemnify. 11 Example: Landlord agrees to indemnify, defend and hold tenant harmless from any injury and any resulting or related claim, action, loss, liability, damage or reasonable expense, including Attorney’s Fees and other Fees and Court and other costs, occurring in any portion of the Common Areas. THE INDEMNITY CONTAINED IN THIS PARAGRAPH (I) IS INDEPENDENT OF LANDLORD’S INSURANCE, (II) WILL NOT BE LIMITED BY COMPARATIVE NEGLIGENCE STATUTES OR DAMAGES PAID UNDER THE WORKER’S COMPENSATION ACT OR SIMILAR EMPLOYEE BENEFITS ACTS, (III) WILL SURVIVE THE END OF THE TERM, AND (IV) WILL APPLY EVEN IF AN INJURY IS CAUSED IN WHOLE OR IN PART BY THE ORDINARY NEGLIGENCE OR STRICT LIABILITY OF THE TENANT, BUT WILL NOT APPLY TO THE EXTENT AN INJURY IS CAUSED BY THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF THE TENANT. 12 Statutes Affecting Indemnity Texas Anti-Indemnity Act Indemnification obligations in construction and related contracts (Tex. Ins. Code Sec. 151.001 et seq.) Architect/Engineer Anti-Indemnity Statute Obligation of Contractor to indemnify architect against its own negligence (Tex. Civ. Prac. & Rem. Code Sec. 130.001 et seq.) Texas Oilfield Anti-Indemnity Act (Tex. Civ. Prac. & Rem. Code Sec. 127.001 et seq.) Products Liability Indemnity Statute Requires indemnification by manufacturer (Tex. Civ. Prac. & Rem. Code Sec. 82.001 et seq.) Sec. 2254.0031 Texas Government Code State agencies prohibited from requiring contractor to indemnify state agency against negligent acts of agency or its employees. 13 Insurance Coverage Commercial General Liability Insurance The indemnitor’s general liability insurance may cover the costs sustained by the indemnitor if the policy has coverage for contractual liability. • It is important that the indemnification obligations are clearly written. • It is important to know what the insurance policy or endorsement will cover. Have to read the policy and all endorsements. Example, if the indemnitor is obligated to indemnify against the indemnitee’s “sole negligence”, the indemnitor’s CGL policy will not cover costs if the policy limits assumed liability to injury or damage “caused in whole or in part” by the insured (i.e. the indemnitor). 14 Additional Insured Endorsements The indemnitee can obtain additional protection by requiring an additional insured endorsement to the indemnitor’s CGL policy. The additional insured endorsement requires the insurer to defend the indemnitee, if suit is brought against the insured and the indemnitee. The language of the additional insured endorsement should be checked for coverage. Some endorsements may not provide defense obligations unless the injury was caused “in whole or in part” by the insured (i.e. indemnitor). 15 Negotiating Contractual Indemnity Obligations Identify the risks to the client: • Is there a substantial risk of liability due to some act of the other party, or the party’s agent? • Can the client be protected by an indemnification? • Can the client get protection through insurance – either own policy or as additional insured? In negotiating the client’s indemnification obligations, evaluate: • The amount of exposure the client has from obligations. • Whether there are ways to limit the exposure through the indemnification provisions. o “to the extent caused by indemnitor” o “injury or property damage proximately caused by” • Whether insurance is available to cover the exposure. Negotiations are more difficult when one party cannot/will not indemnify. 16 Contractual Indemnification Issues Friday, September 21, 2018 Session 11b 1:45-2:45 pm Room 12.106 State Agency Inability to Execute Contractual Indemnity Agreement Threshold issue – State agencies probably cannot agree to contractual indemnity obligations – see AG Opinion MW-475 (1982): “In light of the restrictive constitutional prohibition against state debt, especially when coupled with the "cash basis" requirements of article III.